Reuters poll suggests dollar rally is near an end.

* Reuters poll suggests dollar rally is near an end…
* BOJ officials send mixed messages.
* Sterling continues to slide on BREXIT risks…
* Gold slips as equities recover…

And Now, Today’s A Pfennig For Your Thoughts.

Good morning and happy Friday. As is the custom when we pfill in for Chuck on the Pfennig, Frank has sent me an excellent introduction to today’s newsletter – so take it away Frank:

I spent a good chunk of this week in the only industry conference I attend. It’s called the Tiburon Strategic Advisors CEO Summit. People attending are C-Suite executives of banks, wire houses, independent broker dealers, insurance companies, mutual fund producers, brand new digital advisors, private equity funds. Generally a group you don’t ever see in the same room together. Despite what must sound like a devastatingly boring assembly of humans it has a pretty loose and relaxed feel while dealing with serious subjects (but yes a purveyor of dark suits would make a killing in the room). I did get to sit with old friend John Mauldin for a day and we caught up on the markets and solved all the remaining problems in the world.

This year one of the most heavily discussed items was the new Fiduciary Rule being issued by the Department of Labor this week. I won’t break it down here but in essence when it goes into effect financial providers will need to operate in the client’s best interest when dealing with retirement accounts like IRA’s. Many investors might say – gee, I thought my broker was always on my side – but more astute observers will just shake their heads and say – well it’s about time. I hope that over time you dear readers will think we have acted in your best interests as I think we have, but also expect several more pages of disclosures when you open brokerage statements after the rule goes into effect.

While we were meeting the yield on the ten-year US Treasury Note slide downward again to around 1.70%. Readers may recall that I was concerned about the outlook for US economic growth when this figure stood around 2.20%, now a full 22% lower I can hear the invisible hand screaming that there will be no growth and no inflation on average for ten years. Yikes – that’ll leave a mark. Sounds a lot like Japan – 8 year now since the recession and ten years more of muddle through results equals an 18 year hiccup. The good news for many Pfennig readers however is that many of the most popular currencies have done well this year – I’ll leave to the team to take that away.

As Frank suggested, 2016 has been a good year for clients of the World Markets desk as the currencies and metals have been two of the best performing asset classes during the recently completed 1st quarter. The dollar continued to slide yesterday as the Japanese yen and euro pushed higher during in early trading. But some jawboning by the Japanese Minister of Finance turned the tables overnight and the dollar is recovering a bit in this morning’s European trading.

A Reuters poll released yesterday indicated that many currency strategists now believe that the recent dollar rally is nearing an end. While most of the ‘experts’ believe the dollar will see some additional strength over the remainder of 2016, they have pulled back on their year end calls and warn that the risks are now tilted more to the downside for the greenback. Citi bank analysts sent the following note out to clients “The Fed remains dovish in the face of higher core inflation, the ECB has switched from FX to credit easing and the Bank of Japan revealed its preference- albeit at higher levels – for limited further yen depreciation.” The note concluded with the Citi analysts stating that dollar appreciation “has gone out of fashion”.

Other data showed that outright bullish bets on the US dollar were slashed to the lowest level in nearly two years. So everyone seems to finally be seeing what Chuck has been talking about – the dollar bulls had pushed the US$ too far on the FOMC interest rate expectations. Now that Janet Yellen and her compatriots have pushed the interest rate increases out a bit we are seeing some selling of the dollar.

I mentioned the BOJ Finance minister earlier and wanted to share a bit more detail on what was said. Earlier yesterday BOJ Governor Haruhiko Kuroda said in a quarterly meeting that the central bank was ready to take additional monetary easing steps if needed to hit the bank’s 2 percent inflation target. This was interpreted by the currency markets as a ‘green light’ as there were no indications that the BOJ would step in to halt the yen’s rally. But later in the day Finance Minister Taro Aso said that “rapid yen movements are undesirable, especially if they are abrupt (ok maybe something was lost in translation but wouldn’t most RAPID movements be ABRUPT?? but I digress). Recent movements have been one sided and the government will act appropriately if necessary”. This served to reverse the yen’s recent move higher and it is down just a bit vs. the US$ this morning.

The pound sterling continued to slide after a batch of data released this morning showed a bigger than expected trade deficit along with a drop in industrial output. Brexit fears continue to weigh on the sterling, and the data released this morning added to the reasons to sell pounds as industrial output declined .3% MOM in February and the trade deficit remained just above 12 billion pounds. The pound has fallen to a 2 year low against the euro as opinion polls show that a Brexit continues to be a possibility. Most experts still believe the UK will remain in the EU, but the pound will continue to see volatility going into the June vote.

Gold eased a bit on Friday after an equity rally took away some of the ‘safe haven’ support. But the precious metals will still end the week on a positive note with Gold posting its biggest weekly gain in over a month. Interest rates continue to be a driving factor for the precious metals – with expectations of ‘lower longer’ giving investors more confidence in moving into gold. Worries over the global economic recovery have also helped the precious metals in 2016. Finally, since commodities are priced in dollars they will typically have an inverse relationship with the dollar. US dollar strength weighs on commodity prices, but dollar weakness helps propel prices higher. While precious metals had been facing the ‘perfect storm’ of dollar strength and higher interest rates, both of these have reversed during 2016 leading gold to the best quarter in a couple of decades.

After what has been a fairly slow week for economic data, next week should be pretty exciting, with a bunch of data releases in China including March inflation and exports. We will also get reports on European consumer prices and US retail sales which should give us additional insight on the health of the global recovery.

Currencies today 4/8/16. American Style: A$ .7540, kiwi .6785, C$ .7651, euro 1.1365, sterling 1.4081, Swiss $1.045. European Style: rand 15.059, krone 8.2752, SEK 8.1739, forint 275.08, zloty 3.779, koruna 23.761, RUB 67.2375, yen 108.62, sing 1.349, HKD 7.7584, INR 66.5938, China 6.4733, pesos 17.7620, BRL 3.6770, Dollar Index 94.565, Oil $38.76, 10-year 1.72%, Silver $15.214, Platinum $956.10, Palladium $534.47, and Gold $1,234.36

That’s it for today. I stayed up to watch the Blues vs. Chicago last night – and I’m glad I hung in until the end as the Blues tied it up in the final seconds and then went on to win it in overtime. This clinched home ice for the Blues during the first round, and if they win their final game tomorrow night they will clinch the division title. GO BLUES! Spring has sprung here in the Midwest, and this weekend we will see a combination of freezing temps, warmer sunshine and a few big thunderstorms thrown in for good measure. Good luck to Christine P. who will be running a marathon on Sunday morning, hope the rain holds off long enough for you to get through it. And a big congratulations goes out to Dane M. who passed another securities license test yesterday, way to go! With that I will get out of your hair – I hope you have a Fantastic Friday and Wonderful Weekend. Thanks for reading the Pfennig.

Chris Gaffney, CFA
EverBank World Markets